In essence, the evaluation of stocks conducted by most investors and traders fall into two main camps.
i. Fundamental analysis
ii. Technical analysis
In fundamental stock market analysis, investors attempt to determine the value of a company by examining characteristics such as the company’s assets, liabilities, debt, past earnings, projected future earnings, earnings growth, etc. They would consider buying stocks whose stock price they determine to be ‘undervalued’ compared to what they think the price should be worth with anticipating that the stock price will rise in the future when the rest of the financial world realizes what they determined (i.e. the stock is more valuable than its current price).
In technical stock market analysis, investors and traders examine the past movement of the stock’s price on a chart with particular scrutiny of the patterns of stock price movement. Technical analysts (or technicians as they are sometimes called) draw lines to represent areas of perceived support and resistance to stock price movement, as well as curved lines derived from the stock price (such as moving averages, MACD, stochastics, etc) to help interpret the predicted future bias of the stock. Nowadays, most stock charting software can draw these lines for us, so all we need to do is interpret them.
A detailed description of fundamental and technical stock market analysis is beyond the scope of this article, however, there are many books written on these subjects. On this website, I will share with you some resources that you can access, and my own approach to this topic.
Those interested in learning more about fundamental stock market analysis should read Benjamin Graham’s book ‘The Intelligent Investor: The Definitive Book on Value Investing’. The principles followed by Benjamin Graham, long considered the ‘’father of value investing”, are just as important today as they were in the beginning of the last century. Not surprisingly, Warren Buffet, a value investor himself, comments that this is ‘By far the best book on investing ever written’.
Those interested in learning more about technical stock market analysis should check out the Chart School, which describes in great detail how to read stock charts. Another great resource for technical analysis is the TC2000 website which has a variety of online educational and training videos, including free webinars on technical analysis. Interested individuals can also sign up for free seminars with live training to learn more about the nuances of technical analysis. The TC2000 software, which can be downloaded for free (includes a 14-day trial), has won many awards for being the ‘best’ stock analysis software of its kind.
Some investors and traders use both fundamental and technical analyses in their routine evaluation of stocks to buy – one such method is described by Phil Town (Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week!), who describes a process to find stocks that are undervalued, and then suggests one waits for certain technical indicators to determine when to buy the stocks. Those who would rather have such analyses done for them should check out the AAII (American Associations of Individual Investors) stock screens, which essentially do the ‘hard work’ for us. The AAII’s website also has many articles to educate individuals to become better and more informed investors.
A stock analysis software that combines both stock valuation and technical analysis is VectorVest. As described on their website, ‘VectorVest is the only service that combines the power of fundamental valuation with the insight of technical analysis. VectorVest analyzes, sorts, ranks and graphs over 18,300 stocks daily for Value, Safety and Timing and gives a Buy, Sell or Hold recommendation on every stock, every day’. In addition, VectorVest provides market updates every evening after the market is closed, and an in-depth analysis of the week’s events every Friday evening.
Those who have money to invest and wish to learn more would be best served to open an account and ‘park their money’ in a money market fund while they learn the science and art of playing ‘the stock market game’. OptionsXpress is a brokerage that has great educational resources, including videos and webinars to teach traders the finer nuances of trading stocks, options and futures. Check out their website to discover whether you should consider using them as a brokerage.